The Naked Truth?

Documents accidentally unsealed from Overstock.com's failed lawsuit against prime-broker units of Goldman and Merrill Lynch raise questions about short sales.

Naked short selling has long dwelled in the grassy knoll of the equity markets, denounced by crackpots, devotees of penny stocks, and troubled companies eager to divert attention from their failings. In other words, sightings of it often turn out to be bunk.

Despite this, a failed naked-shorting lawsuit lodged against all of the major Wall Street prime brokers, including units of Goldman Sachs Group and Merrill Lynch, by Overstock.com, has raised intriguing issues. The case, filed in California Superior Court in San...